IAM: securities lending grows revenue as regulation unfolds

The more prime brokers understand how and where clients are consuming balance sheet, the better able they will be to tailor their services and remain profitable, according to a recent article by Institutional Asset Manager.

“For us, the stock lending business will become more important, going forward,” says Jack Seibald, Global Co-Head of Cowen Prime Services LLC, the prime services division at Cowen who last year acquired Convergex. “The securities lending team has done a terrific job in putting together the structure to make it easy for clients to avail themselves of the opportunity.

“As we finalize some of the self-clearing capabilities that we acquired through Convergex, we will be able to make the process even simpler. In an environment where managers are looking to outperform, we can call a manager and say, ‘We notice you are long X security and our securities lending team is noticing that short selling interest is high. Would you like us to lend it out and if so, here’s the rebate rate we can offer you?’”

That enhances a manager’s return in the fund, it adds to performance. A lot of the large primes custody assets under margin agreements, meaning they can lend out those securities through the process of rehypothecation without having to ask the manager’s permission or offer them any rebate.

“We’re looking at this as an opportunity to help managers make incremental returns, not by doing anything new or radical, but simply by allowing them to participate in the lending of securities. They should have that opportunity to monetize as they are the ones making the investment,” adds Seibald.

Sean Capstick is Head of Prime Brokerage at London-based GPP. He confirms that stock lending revenue has been a decent driver of growth for the business.

“Obviously markets have gone up in a straight line for seven-plus years. There are a lot of people with long-bias directionality in their portfolios so shorting stocks has been less prominent than it has been historically. Managers are necessarily a lot more selective. That said, it continues to be a good revenue earner for us. The GC market is over-catered to, there are more names being offered than there is demand, generally speaking. It is in the specialist areas, where pricing tends to be higher and we have a good source of special names, that we can generate a good source of revenue.”

He confirms that GPP has a more competitive element to pricing at a time when people are questioning stock lending levels: “When a client comes to us requesting a special name, whereas in the past there would have been some opacity in the price quoted, today we are able to get a much more transparent, competitive price.”

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